DP2707 Wages and Productivity Growth in a Dynamic Monopoly

Author(s): Helmut Bester, Emmanuel Petrakis
Publication Date: February 2001
Keyword(s): Dynamic Programming, Innovation, Labour Productivity, Monopoly, Wage Differentials, Wages
JEL(s): D24, D42, D92, J30, J51
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2707

This Paper studies the inter-temporal problem of a monopolistic firm that engages in productivity-enhancing innovations to reduce its labour costs. If the level of wages is sufficiently low, the firm's rate of productivity growth approaches the rate of wage growth and eventually the firm reaches a steady state where its unit labour cost remains constant over time. Otherwise, it will gradually reduce its innovation effort over time and ultimately terminate production. Productivity-dependent wage differentials do not affect productivity growth in the steady state; they increase, however, the firm's long-run equilibrium cost level.